Dec '11/Jan '12

MAC Economic Commentary

The mining industry’s international trade and investment priorities

By
P. Stothart

There are few industry sectors in Canada as internationally active as the mining industry. This can be seen through several measures.

Canadian companies are global traders with multi-billion dollar exports in many areas. The Canadian mining industry exported $85 billion worth of minerals in 2010, a figure that equates to 21 per cent of all Canadian goods exported. Key products included aluminum, copper, gold, iron ore, nickel, silver, uranium, zinc, diamonds, potash, coal, and iron and steel, which ranged from $1.7 billion to $15 billion each. The industry also has significant imports and, overall, contributes around 50 per cent of the freight revenue of Canada’s railways.

The mining industry also accesses new capital, ideas and opportunities through high flows of outward and inward investment. Total Canadian direct investment abroad (CDIA) was valued at $617 billion in 2010. The minerals and metal products sector accounted for $58 billion, or 9.4 per cent of this figure; it has held steady at approximately 10 per cent over the past decade. The total stock of foreign direct investment in Canada (FDIC) in the sector grew dramatically in 2007 and remains in the $60 billion range. This represents 10.3 per cent of total FDIC stocks in Canada, up from the five to seven per cent range of previous decades, reflecting the foreign acquisitions that occurred in Canada’s minerals and metals sector in recent years.

In the financial services sphere, Canadian stock exchanges have provided 36 per cent of the world’s mining equity and handled 83 per cent of the world’s mining financing transactions over the past five years. There are many Canadian consultants, analysts, accountants and lawyers who have developed global expertise in the mining finance area.

Finally, through the existence of supportive public policies, among other variables, Canada has built an impressive global base of expertise in mineral exploration in recent decades. There are an estimated 1,000 Canadian exploration companies active in other countries. Companies listed on the Toronto Stock Exchange have over 5,100 mineral projects in varying stages of development outside Canada and the vast majority of these are exploration projects.

While much of this international activity is based upon the principle of comparative advantage, with companies following their relative strengths, there is a role for supportive long-term public policy to help build the most competitive domestic investment regime. There is also a role for Canadian international trade and investment policy, to support Canada’s business involvement and interests in foreign countries.

While not drawing upon any detailed input from industry, my sense is that the following three measures rank as the most potentially useful government trade and investment pursuits for the mining industry over the coming years.

Canada and India launched negotiations in November 2010 towards establishing a Comprehensive Economic Partnership Agreement and have completed three rounds of talks thus far. The intent is to complete negotiations by 2013. This initiative offers the greatest potential of all for the Canadian mining industry, given the size and projected growth rates of India’s economy. The insular nature of India’s economy further reinforces the value of these negotiations. Of note, only three of the aforementioned 5,100 international projects are in India, which speaks to the highly protective nature of India’s trade and investment policies. An economic partnership would also bring greater transparency to India’s business processes and, over time, help to reduce corruption.

Canada and China began discussions on a foreign investment protection agreement during the Ming Dynasty and have since completed over a dozen rounds of negotiations! While this timetable may be a subject for ridicule, there are signs that closure could be brought to an actual agreement over the coming years. China has become an active foreign investor in recent years and holds $3 trillion in foreign exchange reserves, much of which it seeks to invest in hard assets. The country also requires the products and expertise that Canadian mining firms can offer in mineral processing, safety, efficiency and related areas. Agreeing on investment obligations pertaining to national treatment, transparency, transfers, and expropriation and investor-state provisions would represent a positive development for both countries and enhance business prospects for Canadian mining companies.

Canada and the European Union (EU) announced the launch of discussions in May 2009 towards a comprehensive economic agreement and have proceeded on an ambitious timetable. Nine rounds of talks had taken place as of October 2011 and negotiators are aiming for a targeted two-year completion timeframe. A background study estimated that trade liberalization could increase Canada-EU bilateral trade by 20 per cent. While other sectors such as food and agriculture would be more directly affected by an agreement, it is likely that an EU-wide investment protection provision would facilitate Canadian investment in mining opportunities that may exist, particularly in Eastern Europe.

Beyond these three priorities, Canada is also in varying phases of negotiation regarding potential or strengthened foreign investment protection agreements with Tanzania, Madagascar, Mali, Mongolia, Indonesia and Vietnam, among others. Moving these to completion would help support Canadian mining investment and expertise, particularly in Africa and Asia.

Paul Stothart is vice-president, economic affairs, at the Mining Association of Canada. He is responsible for advancing the industry’s interests regarding federal tax, trade, investment, transport and energy issues.